Unmoored Power

May have? Never have so few been able to roil so many in Global Macro markets. As Naim goes on to write in an excellent chapter titled “How Power Lost Its Edge”:

“Insurgents, fringe political parties, innovative startups, hackers, upstart citizen media, leaderless young people, and charismatic individuals who seem to “come from nowhere” are shaking up the old order… each is contributing to the decay of power of navies, television networks, traditional political parties, and large banks…” (The End of Power, pg 51)

***JOIN US LIVE AT 8:30AM ET FOR A SPECIAL EDITION OF THE MACRO SHOW WITH HEDGEYE CEO KEITH MCCULLOUGH CLICK HERE TO WATCH.

Back to the Global Macro Grind…

If you thought US stock market volatility and/or 2% down days were going away, you probably weren’t setup for an alpha generating day yesterday. To put that -2.1% drop in the SP500 in context:

It was the 1st > 2% down day since October 9th, 2014

There have only been 5 down days of > 2% in the last 2 years

There were 20 > 2% down days in the JUN-DEC period of 2011

What happened in both October 2014 and 2H 2011? Global Growth #Slowed, and Treasury Bonds rocked. Yesterday was also the biggest one-day drop in the 10yr UST Yield since October. Fed Fund Futures saw probability drop on a SEP rate hike too.

Can you imagine the US Federal Reserve raising rates into both a #LateCycle slow-down and European Gong Show Part Deux? Don’t forget that the last time Europe was in “crisis” was 2H of 2011. Oh, the memories.

This thing called an ongoing Phase Transition in cross-asset-class-volatility was up just a tad yesterday. Front-month VIX was +34.4% on the day to close at its highest level since US equities were “down YTD” in JAN-FEB.

Which leads me to a very basic risk management question:

If central-planning powers over markets are being unmoored by economic gravity (China, Europe, USA – all slowing at the same time), why wouldn’t the cross-asset-class-breakout-in-volatility you’ve witnessed since July of last year continue?

To review the #history of it all:

US Equity Volatility (VIX) on July 2nd, 2014 bottomed at 10.82

US Equity Volatility proceeded to rocket +142% to 26.25 by October 15th, 2014

Then VIX closed right at 12.11 (at long-term-higher-lows) on May 21st and June 23rd of 2015

All the while, West Texas Crude Oil crashed (-44.4% since the all-time low in cross-asset-class-volatility in July of 2014 when we made our big Macro Theme call called #VolatilityAsymmetry) and multiple rounds of global “easings” were required.

Oh, and you’ve had the fastest 6 months of M&A (+60% year-over-year) since 1980…

But don’t tell anyone who does pro-cyclical macro about the 1981 recession and/or that buybacks, M&A, etc. are an implied signal that corporate profits (and margins) are slowing. Got to manufacture some EPS , eh!

In other news that probably won’t be reported by the mainstream financial media today – whatever was left of the base-effect bounce in European growth continued to slow this morning:

As a result, any objective “economist” should be cutting his/her European “growth” expectations in the 2H of 2015 inasmuch as they’ll ultimately have to cut their real-growth estimates for US and Chinese GDP in Q3 and Q4.

But #NoWorries, the Chinese pumped up the Shanghai Composite index +9% intraday today (biggest intraday move since 1992) by floating another rumor that the National Pension Fund will “buy stocks.”

Heck, when growth and earnings are slowing, someone needs to buy the damn things. God forbid they actually have another 2% down day here at home. The average M&A multiple in the aforementioned #bubble = 16x EBITDA.

In 2007 (i.e. the last US cycle peak) the peak M&A multiple was 14.3x. So we’ve certainly unmoored from that.

Lacalle: This Time Is Different In Greece

Renowned European economist, investor and author Daniel Lacalle joined Hedgeye’s macro team this morning in a special “Flash Call” to discuss the increasingly dire situation in Greece and market implications with our customers.

This is an excerpt from today's call.

Lacalle previously worked at PIMCO and was a portfolio manager at both Citadel and at Ecofin Global Oil & Gas Fund. He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University.

MGM: LAME FIGHT, LAME REVPAR

Takeaway:May RevPAR was disappointing in light of the Pacquiao/Mayweather fight of the century. MGM’s Q2 guidance in doubt

Despite record visitation, LV Strip REVPAR for May came in only at 4.2% YoY, substantially below even the most conservative estimate

Rock in Rio and the Mayweather/Pacquiao fight accounted for a couple of strong weekends but we’re hearing that midweek traffic was slow

There could have been some pressure on convention pricing as two large trade shows (American Wind Energy Association and Coverings) did not appear in May this year. Last year, they had ~32k in attendance. These two shows will not reappear in Vegas in 2015.

MGM had guided to AT LEAST 5%REVPAR growth for Q2 2015. It looks like the company may disappoint investors once again.

Lacalle is a renowned European economist who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel. He is the author of Life In The Financial Marketsand The Energy World Is Flat. He is a lecturer for the IE Business School and Master MEMFI at UNED University.

KEY CALL-OUTS

The Greeks are highly likely (~70%) to vote ‘YES’ on this coming Sunday’s (JULY 5) referendum on the current creditor proposal. In reality this referendum is really a gimmick (this proposal is already off the table with the Eurogroup) – it’s just a front for the ruling Syriza party to wash its hands of any blame.

While the specifics/details of the proposal may be far from understood by the general populous, the overwhelming majority of Greeks want to stay in the Eurozone, and Greece refuses to leave.

Expect Draghi and the Eurocrats to continue to extend & pretend economic reality through QE (printing a Greece every 3 months!) and debt concessions/restructuring that resembles Draghi’s “we’ll do whatever it takes” rhetoric.

Lacalle suggested the Grexit uncertainty is analogous to Hotel California. “You can check out anytime you want but you can never leave.” This is a political decision, not a financial one.

ECB wants to limit contagion on the political level. While financially there is very little contagion to Spain, Italy, France, etc. there’s the risk that Syriza sets an example to other fringe parties across these states that the ECB and Eurocrats – this what they want to squash.

All of the solutions presented by governments and approved by the Troika don’t tackle improving business and job creation. Rather, they simply increase taxes without addressing wasteful government spending.

Yes the ECB will provide opportunities (through QE), but investors need to be aware that pricing of risk is too fixated on what the ECB can vs cannot do –it can print money, butit cannot print growth!

Key Catalysts: Greek maturities in August; elections in Spain in November (whether Podemos party gets stronger or weaker?)

This time is in fact different in the sense that there are ruling radical parties (like Syriza) that are a real threat to the political climate of the Eurozone.

Don’t Expect Resolve to the Greek ‘Crisis’. Expect a Greek recession in the near term and the political/fiscal risk loop to continue for years…

Devaluation of the EUR/USD is here to stay. But Lacalle reminds that the Eurozone countries largely export to one another, so by improving their current account positions, the euro will strengthen, so there a limit to the downside.

Thank You!

Your request has been received

You have been added to our list and will receive an email shortly.

If you do not receive an email, please check your spam filter, and then email
support@hedgeye.com.
By joining our email marketing list you agree to receive emails from Hedgeye. This is a distinct and separate service form any of our paid service products. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.